Arkansas Tax Reform May Increase Administrative Cost of Government By $2.35 million

Smaller government and lower taxes – that is two of the reasons Arkansans made the Republican Party the majority party. But, somehow the legislature’s Tax Task Force’s recommendations to “reform” taxes will result in an increase in the administrative cost of government.

Part of the fiscal impacts of the recommended tax changes the Arkansas Tax Task Force approved in the final meeting earlier this month included estimates of administrative costs to implement draft legislation. “Administrative costs” to implement new laws are code words for “growing government.”

In review of the eighteen months of work of the Task Force, all combined, their report estimates new administrative costs totaling $2.35 million.

We think the estimated cost is low because several of the fiscal impact reports showed $0 cost estimates but the actual costs are unlikely to be zero. The $0 cost estimates reference such things as additional time or resources to update computer programs, tax forms, and instructions. Also included in these zero costs was employee training. Knowing the state spent over $30 million for a computer program for Arkansas’ version of the Obamacare Medicaid Expansion and then later ditched the system because it did not work–it is doubtful these type costs are zero!

Draft legislation JLL051 would create a new pass through entity tax (meaning the Task Force is recommending collecting new taxes from partnerships, limited liability companies, and S Corporations that do business in Arkansas.)

They estimate Arkansas government can collect these new taxes on likely more than 95% of our small businesses by hiring new department employees and increasing processing costs for only ..… $500,000. Even though the proposal will collect the highest rates possible from small business (6.9%), it will then credit back to the owners just over 93%–while the state keeps the rest. Nevertheless, no revenue is shown generated in the impact study. With no net revenue impact given, costs alone would make this a “government growth” measure.

Draft legislation JLL069 includes several provisions that would increase administrative costs. To file a report each year of the tax exemptions and deductions Department of Finance and Administration (DFA) needs $875,000 for new staff including statisticians and economists. For handling a new rebate system on the new tax on ATVs for farmers, DFA would need $650,000 to hire ten new accountants. To implement a new rebate system for certain nonprofit entities, $325,000 is needed for five new accountants.

Three of the increased administrative cost proposals are within JLL069, while this draft legislation would only cut revenue to the state by $1.4 million in the first year. This means it would cost MORE to implement JLL069 in the first year than it would save taxpayers.

New Administrative Costs

New Pass Through Tax

$500,000

Tax Exemptions/Deductions Yearly Report

$875,000

Rebate System for Farmers ATVs

$650,000

Rebate System for Certain Nonprofit Entities

$325,000

Grand Total in New Administrative Costs

$2,350,000

These proposals are just draft legislation at this point, but actual bills are expected to be filed between now and January 14 when the session begins. You can read a summary of all the draft legislation here.

Begin contacting your legislators now and demand that the legislature stops growing government. Ask them to vote “no” on any proposed legislation that increases government spending–even in the name of cutting taxes!